In the second quarter of 2025, Australia saw a 3.0% increase in construction work done. This was much higher than the expected 0.8% rise and is the best growth since early 2023. The construction work data includes both residential and non-residential buildings, as well as engineering projects. Previous reports showed no growth, making this quarter’s results stand out.

Australian Consumer Price Index

At the same time, the Australian monthly Consumer Price Index (CPI) drew attention. In July 2025, the CPI climbed 2.8% compared to the same month last year, exceeding the expected 2.3% increase. CPI figures are important because they signal higher inflation than anticipated in the country, guiding economic forecasts and potential changes in policy. The unexpected rise in July’s inflation to 2.8% is a key focus. This significantly surpasses predictions and brings inflation closer to the top limit of the Reserve Bank’s target range. Thus, the Reserve Bank of Australia (RBA) can no longer take a wait-and-see approach.

Interest Rate Decisions Ahead

The strong construction results, with a 3.0% increase, support a more aggressive stance. This is the best growth we have seen since the first quarter of 2023, indicating that the economy is stronger than previously thought. This gives the central bank a reason to raise interest rates without worrying about an immediate economic setback. We should adjust interest rate expectations to reflect a higher likelihood of a hike at the September meeting. With the cash rate at 4.35%, the market has quickly adapted to this new outlook. Overnight Index Swaps now suggest there is over a 75% chance of a 25-basis-point increase, a significant rise from the 20% chance indicated yesterday. This change in rate expectations is positive for the Australian dollar, as higher yields attract foreign investment. The currency has already risen past 0.6750 against the U.S. dollar due to this news. There are opportunities to use options to position for further Australian dollar strength against currencies with more dovish central banks. For equity markets, we foresee challenges as borrowing costs are likely to increase. This situation mirrors the difficulties faced by the ASX 200 during the aggressive interest rate hikes that ended in 2024. We might consider buying put options to hedge portfolios against a potential market drop in the coming weeks. Create your live VT Markets account and start trading now.

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